A Lift for Recurring Payments?

  Visa believes that the demise of the honor-all-cards rule could boost acceptance of offline debit cards among utilities looking to replace paper with recurring electronic payments. But utilities still like the ACH.
  A surprising outcome of the debit card settlements by Visa USA and MasterCard International that seemed to cut the legs out from under the card associations is that signature-based debit cards could actually emerge from the present turbulence as a stronger payment product.
  While the associations clung as long as they could to their cherished honor-all-cards rules that required merchants to accept their signature-based, or offline, debit cards if they also accepted credit cards, the demise of the long-standing rules could actually open new doors for card acceptance. Specifically, some merchants may prefer to take offline debit only and refuse credit cards.
  Visa, for instance, has said that some utilities seeking to reduce the amount of paper-based payments they process are interested in such arrangements, though the association hasn't named any specific companies or announced any such deals yet. Credit cards cost merchants more to accept than signature-based debit cards.
  Independent card-industry consultant Richard Crone has come up with a new tagline for such a situation: "honor-only-debit."
  "It sounds like a great soundbite," he says, obviously pleased with himself and repeating it several times during an interview.
  More seriously, the soundbite shows, in a simplified way, that all is not lost despite the 30% reductions in offline interchange that Visa and MasterCard are putting into effect this month as part of their settlements. Like an evangelist, Crone plans to persuade his clients, mostly card issuers, that they should stop bemoaning the impending decline in interchange. Instead they should start focusing on the new opportunities the revamped card landscape presents.
  Under the settlements announced this spring, Visa and MasterCard will pay Wal-Mart Stores Inc., Sears, Roebuck and Co. and the five million other merchants who sued them over forced debit card acceptance $3.05 billion and to cut interchange rates for offline debit cards, beginning Aug. 1. That's on top of the repeal of the honor-all-cards rules. Come January, new debit card interchange rates take effect, but the associations haven't announced them yet.
  The loss of interchange clearly will cut into many issuers' bottom lines. Visa issuer Wachovia Corp., for example, said in a U.S. Securities and Exchange Commission filing in May that as a result of the Visa settlement its revenue from debit cards would decrease $30 million to $35 million for the remainder of the year ("The Retailers' Home Run," July).
  While those losses clearly will hurt in the short term, issuers should realize that signature-based cards now may be more attractive to merchants as they consider their payment acceptance options, especially with recurring payments that today are the domain of checks, cash and the Automated Clearing House (ACH), according to Crone.
  "The settlement freed debit," he says. "Before the settlement, companies like mortgage lenders couldn't accept debit cards for payment because card-association policies required the companies to also accept credit cards. Now, however, they can accept debit cards without having to accept credit cards."
  In the case of Visa, Crone is preaching to the choir. The San Francisco-based association, which controls 80% of the offline debit market, is now encouraging issuers to turn encourage consumers to pay recurring telephone, utility, insurance, and cable television bills with Visa's offline debit product, the Visa check card. The Visa check card withdraws money directly from the cardholder's checking account to pay designated bills when they are due.
  'Good Business'
  Visa recently disclosed that offline debit automatic bill payments grew 25% in 2002, with cardholders paying $39.9 billion worth of recurring bills using the Visa check card. That compares with $32 billion in 2001. Armen Khachadourian, senior vice president for merchant sales and integrated solutions, predicts that volume will reach $50 billion this year.
  "Recurring payments made with the Visa check card are growing at the rate of 25% per year," he says. "It's a very good business ... very profitable."
  Visa check card issuers have a 4% share of the $850 billion recurring payments market, according to Khachadourian, adding that the recurring payments market will continue to grow as new categories are added.
  That occurred recently when the American National Standards Institute expanded the merchant category code to allow debit card holders to pay their apartment rent using cards. ANSI coordinates standardization and conformity in procurement systems. "In the past, certain payment limits were placed on the debit card," says Khachadourian, adding that small businesses also are now using the Visa check card to pay bills.
  To help persuade its issuers to see the benefits of pushing signature-based debit for recurring payments, the card association in June introduced the Visa Account Updater, a software program hosted by Visa on Visa's database that updates any changes to a cardholder's account, says Laura DiGioacchino, Visa vice president of acceptance.
  When a cardholder regularly charges transactions to his Visa check card with the same merchants, the merchants' banks keep the card number on file. If the person's card account changes for any reason, and the cardholder does not notify the merchants, the merchant would lose a sale. Visa Account Updater, however, is designed to obviate that. It provides merchants with information concerning changes to the account, says DiGioacchino, adding that 55% of cardholder accounts have some information that changes annually.
  In a statement, Thanassis Mazarakis, president of Chase Merchant Services, the nation's largest merchant acquirer, said that "Visa Account Updater has allowed us to strengthen our merchant relationships by automatically providing them with the most current cardholder information, resulting in reduced cardholder declines due to changed account information."
  The boost for recurring payments only adds more fuel to debit's upward trajectory. According to Dove Consulting Group Inc., debit cards are the nation's fastest-growing payment method. Last year, there were 175 million offline debit cards in circulation, according to CCM sister publication ATM&Debit News. Transactions on those cards grew 22% from 2001. And transactions on personal identification number-based debit cards grew more than 30%.
  Khachadourian refutes the suggestion made by some observers that Visa is only now emphasizing recurring payments to replace future, lower offline debit card interchange.
  "We have always been out front on this issue," he says. "It's the others who are catching up to us."
  But Avivah Litan, vice president and research director for financial services at research firm Gartner Inc., disagrees. She notes that PIN-based (so-called online) debit cards are likely to gain at the expense of Visa- and MasterCard-branded offline cards. Merchants like PIN-based debit because its costs less to accept and provides more security than signature debit.
  "(Visa is) trying to make up for the market share they are going to lose," Litan says.
  Catalyst
  Khachadourian does acknowledge that Visa wants to discuss new revenue sources with its issuers.
  "It (the settlement) is a catalyst, an impetus, to open up the dialogue," he says.
  Khachadourian says Visa is promoting the Visa check card especially as a payment alternative to checks that control 84% of the recurring payments market.
  The promise of debit as a profitable recurring payments vehicle has more than piqued the interest of Bank of America, a Visa issuer that is also the world's largest debit card issuer. The Charlotte, N.C.-based bank is now promoting on its Web site the use of its debit cards for regular payments. "Escape the hassles of writing the same checks month-after-month," the Web site says.
  The Web site explains how to use the Visa check card to pay bills and have them charged directly to BofA checking accounts. Bank of America also is offering an incentive to Visa check card holders to use their cards to pay recurring bills.
  "If you have an airline check card, you may be able to earn airline miles or points towards other bonus programs," the Web site explains. BofA issues cobranded credit cards for US Airways, America West, Alaska Air and Asiana, and some of those programs have debit card components, especially the US Airways program.
  Although loyalty programs like Bank of America's and joint marketing programs may stimulate demand for Visa check card holders to use their cards to pay recurring bills, Litan doesn't believe Visa will get far. She notes that debit cards compete with the ACH, which accounts for about 76% of electronic recurring payments. The ACH has a distinct price advantage over debit cards.
  "Do you want to pay 25 cents per transaction (for ACH) or 1% of the cost of the transaction to accept debit?" she asks. "Duh. That's not a hard choice to make."
  Customer Requests
  AT&T Corp., the nation's largest online biller with two million customers, has accepted bank cards for recurring payments for eight years, but cards aren't the company's favorite form of electronic payment.
  "We began accepting cards for payment because our customers asked us to," Dean Pinou, AT&T's director of remittance management, says from his office in Morristown, N.J. "We would like to see more of our customers migrate to ACH because of our bottom line. You're talking about pennies (with ACH) versus interchange (with cards)."
  Most AT&T customers pay by check, and more than 50% of AT&T's online billing payments are made over the ACH. The balance of online payments is made with cards and other payments methods, Pinou says.
  He adds that some customers pay with cards if AT&T has cut off their service for non-payment. A card payment quickly restores the service. Pinou says he does not know the percentage of card payments made by debit versus credit.
  Amazon.com Inc. is saying the same thing. The Seattle-based online retailer announced in May that it will offer customers an ACH payment option as an alternative to credit and debit card payments because ACH is less expensive than cards for merchants to accept. Senior Manager Jay DeWitt says Amazon's plans to offer ACH debit should serve as a wake-up call for the card associations to lower interchange.
  Amazon.com's and AT&T's support of ACH is more good news for Herndon, Va.-based NACHA-The Electronic Payments Association, which oversees the ACH. In May, NACHA estimated that the dollar amount of ACH payments might exceed $200 billion this year. NACHA reported that online payments were $48 billion during the first quarter, half of the $96 billion for all of 2002.
  While the ACH costs less than cards, consultant Crone and even Amazon's DeWitt see a chink in the ACH's armor-it's a chore for the average person to set up an ACH payment. The customer has to know his checking account's magnetic ink character recognition (MICR) number, including the bank routing number. Those are things that don't often come up in daily conversation.
  DeWitt says Amazon's challenge will be to make it easy for consumers to find the MICR number. Some merchants provide computer graphics on their Web sites that instruct consumers where to locate the MICR line and the bank routing number.
  Gartner's Litan admits that cards are easier to use than ACH when setting up a recurring payment. "You type in your card's number, and you're done," she says.
  Visa and other card backers clearly hope that convenience trumps price, especially since the cost of offline debit card acceptance is coming down.